ESG compliance: understanding regulations & best practices

What is ESG compliance?

ESG compliance refers to a company’s adherence to laws, regulations, and industry standards related to sustainability and ethical business practices. It encompasses environmental protection efforts, social responsibility, and corporate governance policies that align with regulatory requirements and stakeholder expectations.

ESG disclosure is critical to ESG compliance, requiring companies to provide detailed information about their ESG efforts as part of their regular reporting. This growing trend emphasises transparency and accountability in meeting evolving market demands.

Why is ESG compliance important?

ESG regulations have evolved rapidly, both within the UK and globally, reflecting a heightened emphasis on sustainable and responsible business practices.​The UK has demonstrated a strong commitment to advancing ESG standards through several key regulatory initiatives:​

• UK Stewardship Code: Significantly updated in recent years, the UK Stewardship Code aims to enhance transparency and accountability in investment management. The Financial Reporting Council (FRC) introduced changes to reduce the reporting burden for signatories, with a new version of the Code expected to take effect in 2026.
  
  
• Sustainability Disclosure Requirements (SDR): The UK government has introduced the SDR framework to streamline ESG disclosures and ensure that companies provide consistent and comparable sustainability information. This initiative aligns with the UK's goal to establish itself as a net-zero-aligned financial centre.
  
  
• Task Force on Climate-related Financial Disclosures (TCFD): The UK has mandated TCFD-aligned disclosures for large companies, requiring them to report climate-related risks and opportunities. This move aims to improve transparency and help investors make informed decisions regarding climate risks.​

Globally, ESG regulations have seen significant advancements as countries and international bodies strive to promote sustainability and corporate responsibility:​

• European Union's Corporate Sustainability Reporting Directive (CSRD): The EU adopted the CSRD to enhance and standardise sustainability reporting across member states. This directive, which came into force on 1st January 2025, expands the scope of reporting requirements, obliging more companies to disclose their environmental and social impacts.
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• International Sustainability Standards Board (ISSB): Established by the International Financial Reporting Standards (IFRS) Foundation, the ISSB aims to create a comprehensive global baseline for sustainability disclosures. In June 2023, the ISSB issued its inaugural standards, IFRS S1 and IFRS S2, focusing on general sustainability-related financial information and climate-related disclosures, respectively.
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• United States Securities and Exchange Commission (SEC) Proposals: The SEC adopted new climate disclosure rules in March 2024, requiring public companies to report material climate-related risks and, for larger firms, Scope 1 and Scope 2 emissions. Disclosures will begin in fiscal year 2025 filings (submitted in 2026), with emissions reporting phased in from 2026 for large accelerated filers. The rules aim to improve consistency and comparability of climate-related information for investors.  ​

As ESG regulations evolve, businesses worldwide must stay informed and adapt their strategies to meet new compliance requirements, ensuring transparency and accountability in their sustainability efforts.

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Why is ESG compliance important?

ESG compliance is integral for responsible and sustainable business practices. Here is an overview of how ESG reporting helps companies and their stakeholders:

Regulatory adherence

Companies must comply with local and international regulations to avoid fines and legal action. Depending on the jurisdiction, business, and type of compliance breach, various penalties exist for breaching ESG compliance regulations. Company directors can face up to two years in prison or fines of 4% of a business's global turnover, up to a maximum of £20 million.

Investor confidence

Investors are prioritising ESG-compliant companies as they assess financial and reputational risks. Essentially, sustainable investing is a higher priority, with 89% of investors considering ESG factors in their investment approach. This highlights the urgency for companies to maintain ESG compliance, making it easier to attract investors and establish trust and reputability. 

Competitive advantage

Businesses that adhere to ESG regulations build stronger relationships with customers, stakeholders, and regulatory bodies. Consumers are increasingly becoming environmentally conscious and value businesses that share these priorities. 88% of customers have greater loyalty to ESG-compliant companies, giving them an organisational competitive advantage. 

Operational efficiency

ESG compliance and operational efficiency are naturally intertwined. Focusing on sustainable and ethical processes enables businesses to reduce waste, optimise resources, save money, and build stakeholder trust, which leads to improved long-term financial and operational performance. 

Risk mitigation

Companies that follow ESG compliance guidelines can reduce risks related to environmental damage, labour disputes, and corporate governance failures. These practices promote corporate responsibility and encourage sustainability regarding businesses' impact on the environment and how they manage their employees and stakeholder relationships. 

Key ESG compliance regulations

As ESG regulations evolve, businesses must stay updated on key frameworks and legal requirements worldwide. ESG regulation imposes legal responsibilities and potential penalties for non-compliance, distinguishing it from voluntary frameworks. Notable ESG compliance regulations include:

• EU’s Corporate Sustainability Reporting Standard (CSRD): Requires companies to disclose ESG performance and sustainability efforts from a double materiality perspective. Learn more about the CSRD and it’s ESG reporting requirements. 
• SEC Climate Disclosure Rules: Mandates climate-related financial risk disclosures for U.S. public companies. Find out more about the SEC's regulations here. 
• Sustainable Finance Disclosure Regulation (SFDR): A European regulation to improve transparency in sustainable investments. Read this article for information on SFDR.  
• The Task Force on Climate-Related Financial Disclosure (TCFD): Provides guidelines for companies to disclose climate-related risks and opportunities. Check this blog post for TCFD guidelines and how they impact ESG reporting. 
• The International Sustainability Standards Board (ISSB) SB: Develops global sustainability reporting standards for financial institutions and businesses. Here is a guide on IFRS S1 and S2 metrics. 

ESG framework and standards

‍ESG frameworks and standards provide guidelines and principles for companies to follow in their ESG efforts. These frameworks help companies identify, measure, and report on their ESG performance, ensuring industry consistency and comparability. Some widely used ESG frameworks and standards include the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), and the TCFD.These frameworks and standards are crucial in helping companies manage their ESG risks and improve their sustainability performance. By adhering to these guidelines, companies can enhance their transparency and accountability, build stakeholder trust, and demonstrate their commitment to sustainable business practices.

Steps to achieve ESG compliance

Businesses can take a structured approach to ESG compliance by following these key steps:

1. Assess ESG regulatory requirements

Identify relevant ESG regulations based on industry, geography, and business operations. Consult legal experts and regulatory authorities to ensure compliance with mandatory and voluntary reporting standards.

2. Develop ESG policies and goals

Establish clear ESG policies aligned with compliance requirements. Set measurable sustainability goals, such as reducing carbon emissions, improving labour conditions, and enhancing corporate governance transparency.

3. Implement ESG data collection and reporting mechanisms

Use ESG compliance software, like KEY ESG, to automate data collection, track key ESG metrics, and generate compliance reports. KEY ESG reports summarise a company’s efforts toward environmental, social, and governance compliance over a specified reporting period, highlighting the importance of clarity and relevance to various stakeholders. 

4. Integrate ESG and corporate governance into business operations

Ensure ESG principles are embedded in supply chain management, risk assessment, financial planning, and corporate decision-making processes.

5. Monitor regulatory changes and conduct audits

Regularly review and update ESG strategies to reflect evolving compliance requirements. Conduct internal and external audits to assess ESG performance and address gaps.

6. Engage stakeholders and communicate ESG efforts

Maintain transparency by engaging with investors, customers, employees, and regulators. Sustainability reports are crucial for regulatory compliance and stakeholder engagement, as they help companies adhere to regulations mandating climate-related disclosures and communicate their ESG practices effectively. Publish sustainability reports and ESG disclosures on at least an annual basis to build trust and credibility.

Challenges in ESG compliance and how to overcome them

Many businesses face obstacles when navigating ESG compliance. Here’s how to address them:

Complex and evolving regulations

ESG laws vary across regions and frequently change, making it complex for businesses to stay ahead of and maintain regulatory compliance. Solving this challenge requires organisations to implement ESG compliance software that provides real-time regulatory updates and reporting automation. 

Data management issues

Collecting, analysing, and reporting ESG data can be overwhelming and time-consuming. Managing this data exposes companies to costly errors, highlighting the need for robust ESG data management that consolidates key metrics and ensures accuracy.

Lack of standardisation

Different ESG frameworks create inconsistencies in reporting. The only solution to this challenge is for companies to adopt globally recognised ESG reporting standards like GRI, SASB, or ISSB. KEY ESG’s compliance software ensures organisations report in a consistent, standardised way, in-line with global regulatory requirements.

Limited ESG expertise

Many organisations lack in-house ESG professionals who understand how to drive ESG initiatives, manage ESG risks, and ensure companies fulfil ESG criteria. Organisations must prioritise ESG training programs and collaborate with external professionals to ensure they achieve their sustainability goals. 

Cost constraints

Compliance initiatives can be resource-intensive and require a high upfront cost to implement. Businesses can simplify this challenge with ESG compliance technology to reduce manual errors and optimise resource utilisation. 

ESG risk

Legal and regulatory compliance requires proactive management of ESG risks. Organisations must conduct rigorous assessments of their regulatory requirements across different regions, especially in the EU, where different countries may adopt different transposing laws for CSRD regulation. Avoiding reputational and financial risks from non-compliance is of utmost importance.

ESG compliance checklist

Use this checklist to ensure your business is on track with ESG compliance: 

• Identify and understand applicable ESG regulations
• Develop an ESG compliance policy and sustainability goals
• Implement ESG data tracking and reporting software
• Align business operations with ESG principles
• Monitor regulatory changes and update policies accordingly
• Conduct regular ESG audits and assessments
• Engage stakeholders and maintain transparency in ESG reporting
• Train employees and leadership on ESG compliance best practices

The future of global ESG compliance

Sustainability regulations are increasing in scope and rigour globally. More companies are being required by law to report on ESG metrics, and on a broader range of metrics. The quality of data is also increasing, with requirements for external auditing now being considered the norm. To keep up with these requirements, businesses must understand the future of global ESG compliance and what factors shape how they conduct ESG reporting. 

Evolving regulatory landscape

The UK government is intensifying its focus on ESG compliance, with the Financial Conduct Authority (FCA) set to regulate ESG rating providers starting in early 2025. This initiative aims to enhance transparency and reliability in ESG assessments, ensuring companies adhere to standardised reporting practices. By introducing regulatory oversight, the FCA seeks to provide investors and stakeholders with more consistent and verifiable ESG data, reducing the risks of misleading or exaggerated sustainability claims. 

Both developed and growing economies worldwide are also advancing their ESG regulations to promote sustainable business practices. In Japan, the Financial Services Agency (FSA) implemented new rules in 2023 that require all listed companies to disclose sustainability-related information in their annual securities reports. These disclosures are structured around the TCFD pillars: Strategy, Metrics and Targets, Governance, and Risk Management. Additionally, the Sustainability Standards Board of Japan (SSBJ) is developing more prescriptive sustainability disclosure standards, expected to come into effect by April 2025, and aligned with the ISSB.

In Brazil, the SEC’s Resolution CVM No 193/2023 requires listed companies and investment funds to produce sustainability reports following ISSB standards starting from the base year 2026, with voluntary adoption allowed for 2024 and 2025. Further, in late 2024, Brazil’s Congress approved legislation establishing rules for a carbon credit market—supporting regulated and voluntary trading schemes—to incentivise emissions reductions. These developments reflect a global push for enhanced ESG regulation, signalling that companies must continuously adapt to emerging frameworks and align their operations with international sustainability expectations.

Technological advancements enhancing ESG compliance

Technology is crucial in streamlining ESG compliance, with artificial intelligence (AI) and natural language processing (NLP) revolutionising how companies monitor ESG risks and performance. These advanced tools analyse vast amounts of data from various sources, including corporate reports and news articles, allowing businesses to detect ESG risks in real time and improve the accuracy of their disclosures.

Blockchain technology is also emerging as a key enabler of ESG transparency. By providing immutable records of sustainability-related data, blockchain ensures traceability in ESG reporting, helping companies verify their sustainability claims and track compliance across complex supply chains. This innovation is particularly valuable for industries requiring detailed environmental impact tracking and responsible sourcing.

Proactive integration of ESG strategies

To navigate the future of ESG compliance, global organisations and medium and large businesses companies must integrate ESG initiatives into their overall business strategies. Embedding sustainability considerations into core operations ensures that ESG efforts align with long-term corporate objectives, ultimately enhancing resilience and competitiveness in an increasingly sustainability-focused market. Companies that proactively integrate ESG into their business models will be better positioned to adapt to regulatory changes and investor expectations.

Another critical step is investing in advanced ESG data management solutions. Businesses can accurately track and report ESG metrics by leveraging sophisticated analytics tools, ensuring compliance with emerging regulations. These data-driven approaches enhance transparency and provide valuable insights that help organisations optimise their sustainability efforts and mitigate risks. 

Get ESG compliant today

ESG compliance is no longer optional—it is a critical factor in corporate sustainability, investor confidence, and regulatory adherence. Businesses must proactively implement ESG strategies, leverage compliance software, and stay informed about evolving regulations.

To streamline ESG compliance, companies should invest in ESG software solutions that automate reporting, track regulatory changes, and improve efficiency. By taking a structured approach, organisations can enhance their ESG performance, mitigate risks, and gain a competitive edge in the market.

Ready to achieve and simplify ESG compliance? Request a demo today.